Stock Analysis & Ideas

WIX Stands Steady on Unique Business, with More Room to Run

Story Highlights

WIX is no stranger to the headwinds that are plaguing the economy currently. However, despite this, there are a few fundamental strengths that are keeping analysts moderately upbeat about the company’s prospects.

Wix.com (NASDAQ: WIX) is one of the torchbearers of the DIY web development market, which provides a cloud-based platform suitable for the use of web developers and designers of all levels of expertise. The platform boasts about 165 million registered users, and it uniquely uses its freemium-based business model to transfer non-paying registered users to premium subscriptions.

The company recently reported quarterly results, which showed strength in the top line, despite falling short of bottom-line expectations. Also, the guidance provided by management was weaker-than-expected, taking into account the headwinds coming in from the Russia-Ukraine conflict, as well as currency fluctuations.

The Positives

Nonetheless, after the company held its Analyst & Investor Day on May 19, Needham analyst Bernie McTernan decided to reinforce his Buy rating on the stock. He believes that Wix’s stronghold in the DIY web design industry and its growing popularity with design agencies will help boost the adoption of its online solutions, thereby boosting its valuation.

Also, the increasing uptake of the new tools designed by existing users is driving Wix’s annual recurring revenue higher, which is encouraging.

McTernan was encouraged by Wix’s “wide funnel approach to user acquisition,” leveraging its freemium-based model, which the analyst believes is “attractive through both a value creation and marketing efficiency lens.”

Moreover, the analyst also pointed out the penetration of small and medium-sized businesses in the DIY web design market and sees strong upside potential from companies going digital and switching from existing domains.

Importantly, McTernan was most positive about the fact that Wix’s consumer base is “relatively inelastic,” meaning companies will keep updating their websites despite any price changes, simply to boost their businesses. This means that the monetization opportunities through its consumers are largely sustainable, which could contribute to Wix’s long-term growth trajectory.

Points to be Cautious On

However, taking into account the external headwinds, such as geopolitical tensions and the resurgence of COVID-19 in China, McTernan maintained a more conservative revenue outlook for the medium and long term. The analyst also kept his expectations of medium-term gross margin guidance low, as he is still looking for stronger signs of margin recovery before bumping up his outlook.

“The next 18 months should be important for WIX with the expectation they should benefit from a return of the top of the funnel in addition to indications of the ability to expand gross margins,” opined McTernan.

The analyst set a price target of $85 on the WIX stock.

Wall Street Weighs in

Wall Street also echoes the cautiously optimistic sentiment of McTernan, with a Moderate Buy rating based on 10 Buys, five Holds, and one Sell. The average WIX price target is $99.07, indicating 58.8% upside potential from current levels.

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